MAY 18, 2011, 10:28 A.M. ET.2nd

UPDATE: Deere 2Q Net Up 65%; Raises Full-Year Sales, Profit View

By Bob Tita
Of DOW JONES NEWSWIRES

Deere & Co.'s (DE) fiscal second-quarter earnings surged 65% and the company raised its sales and profit forecasts for the year, as favorable market conditions for farm commodities continues to drive demand for farm machinery.

Deere beat expectations for the quarter as farmers around the world responded to high crop prices by stepping up their purchases of tractors and harvesting combines. But the company's margin on farm machinery weakened, despite a big increase in sales.

Deere's stock sank at the opening, and were recently off 2.2% at $85.06.

Deere, the world's largest manufacturer of farm equipment by sales, expects strong demand for farm machinery to persist for the remainder of its fiscal year and boosted its industry-wide sales outlooks for both the U.S. and Europe.

Deere, which also makes construction and forestry equipment, predicted that its overall sales this year will rise 21% to 23% over last year, up from the 18% to 20% increase forecast in February. The company now sees full-year net income of $2.65 billion, a $150 million increase from its pervious outlook.

The higher view comes amid rising prices for steel, copper and other materials and negative effects from the Japan earthquake and tsunami amounting to about $300 million in sales and $70 million in operating profit this year. The company relies on components from Japan to produce construction excavators in a joint venture with Japan's Hitachi machinery company.

Deere's farm machinery sales in the quarter rose 24% from a year ago, as operating income increased 22%. But the company's operating margin on farm equipment slipped slightly to 16.6% from 16.8%, indicating profit pressure from rising costs and suggesting the lower-margin equipment accounted for much of the sales increase in the quarter.

"The expectation is that if you're doing well on the sales side it's going to trickle through to the margin side," said Jeff Windau, an analyst with Edward Jones. "There are some [cost] pressures building on the company."

The company announced Wednesday that it will build a farm machinery plant in Northeast China. The $80 million plant, Deere's seventh manufacturing site in China, is expected to be up and running late next year.

Sales of construction and forestry equipment soared 45% off the depressed levels of a year ago. Profit more than doubled, even as the Moline, Ill., company acknowledged that weakness in residential and commercial construction continues to be a headwind for equipment demand. The operating margin on construction equipment doubled from a year ago to 7.9%.

For the quarter ended April 30, the world's largest manufacturer of farm machinery by sales reported a profit of $904.3 million, or $2.12 a share, up from $547.5 million, or $1.28 a share, a year earlier. Excluding prior-year charges related to the U.S. health-care overhaul, prior-year earnings were $1.58 a share.

Revenue climbed 25% to $8.91 billion. Equipment sales grew 27% to $8.33 billion as currency exchange added three percentage points and price increases added four points to the growth. Equipment sales rose 17% in the U.S. and Canada and jumped 45% elsewhere.

Analysts forecast earnings of $2.06 on revenue of $8.14 billion.

--By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com

http://online.wsj.com/article/BT-CO-201 ... 08793.html